When landlords get new loans, tenants need to protect their rights

Tyler S. Bobes is a partner in the real estate practice group of Cleveland-based Walter | Haverfield.

Tenants often wrongly assume that they don't have the authority or leverage to negotiate terms when they are asked to sign a subordination, non-disturbance and attornment agreement (SNDA).Lenders typically require this documentation when they are issuing or refinancing loans on properties. Tenants need to realize it is not a simple disclosure. In some cases, tenants might not take sufficient time to review the terms and understand the consequences of this seemingly routine document. However, if not properly negotiated, an SNDA can create a major liability and unfair financial obligations for the unaware tenant.While SNDAs are executed by the landlord, tenant and the lender, in reality SNDAs tend to primarily impact the lender and tenant. From a broad perspective, the intent of the SNDA is to (a) subordinate the lease to the lender's mortgage; (b) ensure the lease and related tenancy are undisturbed in the event of foreclosure; and (c) require the tenant to recognize the lender landlord as its new landlord following such foreclosure.SNDAs commonly go beyond these functions and may, if the tenant is careless, rewrite provisions of the lease in the event of a foreclosure. A lender's form SNDA attempts to shield lenders from most of the landlord's liabilities under the lease. If negotiated properly, however, tenants can modify the form to not only better secure their post-foreclosure rights but, in some cases, cause the lender to act as a guarantor of the landlord's legal and contractual obligations under the lease. This article will focus on a few common SNDA provisions and the tenant's desired position.

Acts or omissions of the landlord

The typical lender's form may provide that the lender will not be liable for the acts and omissions of the landlord. This would include the obligations of the landlord to perform repairs and/or replacements, as well as to make reimbursements to the tenant under the lease. In the event of a foreclosure, tenants will want to preserve any rights and remedies the tenant may have as a result of any pre-foreclosure breach by the landlord. One way to secure these rights is to provide that, contrary to the lender's form, the lender will be liable for the acts and omissions of the former landlord, so long as the tenant provided the lender the same notice and cure period afforded to the landlord under the lease. Without the addition of such language, the lender could permit the default to continue indefinitely and require the tenant to pay rent without recourse.

Offsets or defenses against the landlord

Lenders will seek to ensure that they not be subject to any offsets and/or defenses which the tenant may have against the former landlord. This would include any specifically negotiated offsets and defenses the landlord agreed to in the lease, including, for example, the tenant's right of offset against rent in the event the landlord fails to pay the tenant a tenant improvement allowance or any other tenant reimbursable. As such, tenants should look to carve out any offsets and defenses previously negotiated in the lease.

Construction-related obligations of the landlord

A third key issue involves construction obligations. Lenders look to avoid liability for the landlord's construction-related obligations under the lease. Both the lender's and the tenant's potential exposure could be significant. As such, these provisions are difficult to negotiate.A common protection for the tenant is to allow for the tenant to have the right to self-help and perform the landlord's construction-related obligations coupled with the ability to offset the costs (or a significant percentage thereof) against the tenant's monthly rent until the tenant is made whole.

Amendments and modifications

Finally, a lender's form SNDA will attempt to void any amendments or modifications of the lease which were not expressly consented to by the lender.Lenders primarily want protection against any modifications to the approved terms and material financial obligations. Obtaining the lender's consent to a modification, even a simple amendment, can be a cumbersome process. As such, tenants should attempt to carve out the consent requirement for non-material modifications.An alternative approach would be to deem the modification approved if the lender fails to respond to a request for consent in a timely manner. At a minimum, the tenant will want to make sure that the lender's consent to any amendment or modification to the lease is not unreasonably withheld, conditioned or delayed.SNDAs are often overlooked by tenants at their peril. It is important to remember that lenders will often only seek SNDA from critical or significant tenants. As such, a tenant should recognize that, to a degree, they may be negotiating from a position of strength, albeit from a form that appreciably favors the lender.

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